With reference to Indian economy, demand-pull inflation can be caused/increased by which of the foll

Question

With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following?Expansionary policiesFiscal stimulusInflation-indexing wagesHigher purchasing powerRising interest ratesSelect the correct answer using the code given below.

Accepted Answer

Demand Pull Inflation is caused by increase in demand when the demand in the economy outgrows the supply.Statement 1 (Correct): Expansionary policies increase money supply and can cause demand-pull inflation.Statement 2 (Correct): Fiscal stimulus stimulates economic activity leading to demand-pull inflation.Statement 3 (Incorrect): Inflation-indexing wages links wages to inflation, so effective change in purchasing power is zero.Statement 4 (Correct): Higher purchasing power means households can demand more goods/services.Statement 5 (Incorrect): Rising interest rates decrease money supply, thus cannot cause demand-pull inflation.